The Property Correction In Dubai Is Coming

It’s been a year since the Dubai real estate market began to slowdown with the double whammy of doubling of transaction fees and a tightening of mortgage lending by the UAE Central Bank. That brought the world-topping 30 per cent price rise of 2013 to a swift end, and property agent Knight Frank reports the amount invested in Dubai property in the first half of 2014 was less than half that invested in the same months of 2013.

However, price falls have been fairly rare until recently. Motivated-sellers, as they are known in the trade, now find that they have to reduce their prices to find buyers in all but the most popular locations. This is how markets work. First the volume of sales declines and sellers resist cutting prices. Then somebody breaks rank and the others have to follow if they want to sell, so prices go down.

I’ve been tracking the build up of a large excess inventory of Dubai residential real estate in my subscription-only newsletter. Back in the Spring, residential units available for rent or sale on theDubizzle.com website hit 192,000, admittedly a figure that multiple listings would net down to a much lower amount. In mid-October, that figure was down but still high at 164,000.

It is impossible to estimate exactly how many empty units for rent or sale this now represents. But this could easily be 30 to 40,000 when netted out. There are also around 15,000 units being added annually to this inventory by developers, according to the survey carried out by my old friend at Emirates Specialities Company.

This building materials producer and supplier has reviewed all the major projects now underway in Dubai by the top developers to reach this conclusion.

However, 15,000 units will barely keep pace with the current rate of population expansion. This is nothing like the excesses of the 2003 to 2008 Dubai boom. But the mounting oversupply of property in the emirate is still likely to result in a price correction over the next 12 months or so.

There has also been a marked deterioration in the economic outlook for Dubai over the summer. Oil prices are down sharply. The dollar-linked dirham has appreciated very quickly making Dubai tourism and trade less competitive. Interest rates are going up. The global economy appears to be slowing down and not expanding as previously thought.

Geopolitical events are another headwind. The progress of ISIL is alarming to everyone in the Gulf. The nuclear talks in Iran are coming to an end. Ebola is bad for the travel business. The sanctions against Russia have crushed the ruble. Dubai is a global hub city and business here is far from immune.

That said, the real estate cycle this time looks far more like a typical one, and will contain the seeds of its own recovery. Given the propensity for projects to fall behind schedule for all manner of reasons from less than expected pre-sales to problems with raising construction finance or sourcing suitable contractors, a shortage of property could emerge again in the near future like the one that propelled Dubai house prices to gain the most in the world last year. Demand for housing has also exceeded expectations before.

All the same, in the meantime the Dubai real estate market still has a large inventory to fill, oil prices are falling and global interest rate trends are now against real estate. This will put a squeeze on prices and rents in the short-term, though the correction will be a more normal real estate cyclical downturn of 20 to 30 per cent rather than the massive 60 per cent drop of the local recession of 2009.

Nonetheless, the Emaar Malls Group IPO attracted $60 billion in subscriptions at the end of September, and you have to wonder where this liquidity will move to next if the local stock market correction becomes a slump. In 2006, when a stock market bubble burst in Dubai, the money flowed into real estate for almost three years. Dubai real estate remains cheap by the standards of London, Hong Kong and New York so you cannot discount the possibility of still higher prices. Nobody thought it would happen in 2006 either, but it did.